Educational Articles

Stock Screen: Best & Worst Performing Industries - September 21, 2012

Robert M. Greene, CFA
| September 21, 2012

Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization). This data also forms the basis for the Relative Strength price charts found on each industry page in The Value Line Investment Survey.

In terms of our best-performing list, the Property Management Industry has kept a low profile this year. In this week’s ranking, the group took home seventh place, checking in with a gain of 10.9% for the preceding six weeks. (By comparison, Homebuilding just edged out Precious Metals for the top spot, 24.4% to 24.3%, while the broader market, as represented by the Value Line Arithmetic Average, rose 6.3%.) This marks Property Management’s first appearance in our top seven since a brief stay during the spring. The group’s relative obscurity, though, hasn’t stopped it from being a winning play for investors so far in 2012. Moreover, the gains have been broad based with all seven stocks in the group ringing up market-beating price gains year to date.

The stars of the show have been the group’s two prison operators, Corrections Corp. of America (CXW) and The GEO Group (GEO). The shares of both companies have advanced more than 65% this year. These companies are benefiting from generally favorable fundamentals in the detention center space. Still-elevated unemployment rates and rising inmate populations are boosting demand for prison-management services. This should help to drive 15% earnings growth at GEO this year, though progress at Correction Corp. figures to be rather limited, due partly to increased spending on new facilities.

Meanwhile, the companies appear to be operating from the same playbook in a number of important respects. This year, for instance, Correction Corp. and GEO both instituted quarterly cash dividends, each at $0.20 a share. This represents a current yield of 2.3% for CXW shares and 2.9% for GEO shares. By comparison, the typical dividend-paying stock in the Value Line universe offers a yield of 2.3%.

In addition, both companies are looking into converting to real-estate investment trusts. (Incidentally, another of the property managers, W.P. Carey (WPC), is already in the process of making this transition.) The key advantages of such a change would include a more-efficient corporate tax structure, better access to external funding, and the potential to lower the cost of capital. The REIT structure, though, also requires that 90% of net income be returned to shareholders. By comparison, current payouts represent about half of each company’s earnings. The prospect of significantly higher dividends in the years ahead will undoubtedly pique the interest of income-oriented investors. On the other hand, the potential reduction in funds available for investment and development would be a concern for more growth-oriented accounts.

Elsewhere, Brookfield Asset Management (BAM) stock, up 2% in the past six weeks, hasn’t contributed much to the industry’s recent run, and its 29% share-price advance looks fairly pedestrian compared to sizzling gains of the prison stocks. Investors, though, shouldn’t be dissuaded from taking a closer look here. Brookfield is easily the largest company in the industry. Operating three main businesses (real estate, power generation, and fund management), it generated revenues of nearly $16 billion last year, more than the rest of the industry combined.

The top line should advance at a high single-digit pace in 2012, helping to support 8%-10% growth in earnings. Profits ought to press ahead at an even better clip (about 15%-17% per year) through the middle of the decade, as well. The company’s expanding exposure to fast-growing economies, including Brazil, is among the initiatives that appear to offer promising upside. With this in mind, BAM stock offers wide price-appreciation potential to 2015-2017.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.